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Investor exposure to the S&P 500 is the highest since mid-2023, Citi strategists said.
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They said exposure levels at that time were followed by a 10% decline in subsequent months.
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“Positioning risks increase when markets are expanded in this way,” they said.
The market is showing warning signs of a possible stock decline as exposure to the S&P 500 increases, Citi says.
The strategists said long positions in the S&P 500 are now at their highest levels since mid-2023. At that time, that level of exposure to the benchmark index was followed by a decline of more than 10% over the ensuing three months.
“We are not suggesting that investors should reduce their exposure, but positioning risks do increase when markets are expanded in this way,” the strategists, led by Chris Montagu, said in a note on Monday.
The upswing in the S&P 500’s positioning comes as the index has risen nearly 23% this year.
The analysts attribute that bullishness to hopes for a soft landing for the economy, plus a positive wave of third-quarter earnings to date.
“Bullish momentum continues for US markets, but especially for the broader S&P 500, evidenced by the continuation of new long positions and, to a lesser extent, the covering of short positions,” the analysts said.
“The ongoing ‘soft landing’ narrative, combined with a solid reporting season (so far), has undoubtedly supported this momentum, despite the uncertainty of the US elections next month,” she added.
The analysts acknowledge that compared to the high positioning levels of mid-2023, current levels for investors are not as high as they were then, and they are less at risk compared to the last time exposure to the S&P 500 rose this high.
“The current P&L, while positive, is certainly not below par, suggesting less capital at risk and therefore less incentive to hedge if markets pull back,” they say.
The analysts add that while positioning in the S&P 500 has increased, positioning on the Nasdaq remains relatively low.
“S&P’s positioning has expanded further and has now reached a three-year high. Investor conviction for the Nasdaq remains low, with net positioning at neutral. A common feature for both markets is that 100% of short positions money, which poses potential short-term upside risk if markets continue to rise and short positions need to hedge,” they say.
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